VA Manual Underwriting Guidelines on VA Loans

In this blog, we will discuss and cover VA manual underwriting guidelines on VA loans. Manual underwriting VA loans is something we at Gustan Cho Associates specialize in. Many times, you will not receive an approved eligible AUS findings report. That does not mean your loan is dead, it simply means you must downgrade to a VA manual underwriting file. Now that is scary for many clients, but it shouldn’t be.

VA Manual Underwriting Lenders with No Lender Overlays

Gustan Cho Associates originate, processes, underwrite, and CLOSE VA Manual Underwriting loans all of the time. Many veterans think that paperwork to complete VA manual underwriting is extensive and the loans are impossible to close. With an inexperienced lender that can be the case. We will detail one of the main qualifying components of a manual underwrite, which is debt to income ratio caps.

VA Manual Underwriting Guidelines On Front End And Back End Debt To Income Ratio

It is important to understand there are two debt-to-income ratios for mortgage qualifications. Front-end DTI and back-end DTI. Debt to income ratios is different for every borrower. Debt to income ratio is simply a ratio of your debts against how much money you make (Gross Pay).

Front end debt to income (housing ratio):

  • Front end debt to income ratio is the total of your housing payment / your total gross monthly income

Back end debt to income:

  • Back end debt to income is the total of your housing payment plus your consumer debts / your total gross monthly income

Consumer Debt is all debts that report to your credit report.

  • For example, a vehicle payment will be in your DTI ratio, but a cell phone bill will not be

Housing payment means principal, interest, property taxes, insurance, and any homeowners association dues. TOTAL HOUSING PAYMENT

DTI example:

  • Housing payment $2100 Consumer debt $9000 Total income $5600

Front End DTI – 37.50%   Back end DTI – 53.57%

VA Debt To Income Ratio Guidelines

VA loans do not have a maximum debt to income ratio guideline from HUD. Many lenders have LENDER OVERLAYS that limit the debt to income you can go up to. With Approve Eligible AUS findings, we have seen 63% back-end DTI gets approved. What happens when your application is not an Approve Eligible AUS?  You then downgrade the file to a manual underwrite. It is underwriter discretion on how high they will allow the veteran to go. In my experience, the highest I have seen is a 54% back-end debt to income ratio.

Lender Overlays on VA Manual Underwriting 

There is not a true guideline on maximum front-end debt to income ratio, once again this is underwriter discretion. If you have been told you do not qualify for a VA loan, make sure you ask your lender if they are able to complete manual underwriting. Most lenders do not manually underwrite, so they will tell you don’t qualify. Please reach out to us for a second opinion (or third opinion). After a brief conversation, we will have a good understanding if we can help you. There are many ways to strengthen a loan that requires manual underwrite. Ways to strengthen your application are called compensating factors.

Importance Of Compensating Factors On VA Manual Underwriting

Compensating Factors On VA Manual Underwriting

What are a few examples of compensating factors? In the following subparagraphs, we will discuss and cover the importance of compensating factors. Compensating factors are important for borrowers with high debt to income ratio on VA loans.

Reserves Are Compensating Factors on VA Manual Underwriting

Reserves –

  • Funds available after closing costs and any down payment you decide to put down
  • These funds must be verifiable in a bank or a retirement account
  • Having extra funds available after closing is going to give you the best chances for qualification
  • To be used as a compensating factor, you must have 3 months for 1 – 2 unit homes and 6 months for a 3 – 4 unit property

The Importance of Past Work History

Longevity on the job-

  • If you have been working in your current position for 5 years or greater, the underwriter can see the stability
  • Giving you a higher chance of getting your loan approved

What Is Payment Shock?

VA Manual Underwriting Guidelines On Payment shock

  • Payment shock refers to your housing payment and if it is increasing or not
  • To be used as a compensating factor, your payment must not increase by more than 5%
  • This includes PITIA (principle, interest, taxes, insurance, and any homeowner’s association dues)

Residual Income Guidelines on VA Loans

Residual Income Guidelines on VA Loans

VA Manual Underwriting Guidelines On Residual Income:

  • Maybe the reason HUD does not set a maximum allowed DTI ratio
  • Residual income is another topic that can be quite confusing
  • Please see our blog on VA RESIDUAL INCOME
  • This MUST be passed whether you have an approve / eligible AUS or require a manual underwrite
  • Residual income is based on location and family size

The AUS findings will tell you how much residual income you are required to have for your loan.

Starting And Qualifying For Manual Underwriting Pre-Approval Process

Do I start my application?

First, gather the following documentation:

  • Last 60 Days Bank Statements – to source money for escrows
  • Last 30 Days Pay Stubs
  • Last Two Years W2’S
  • Last Two Years Tax Returns
  • Driver’s License
  • Certificate of Eligibility
  • Name of contact to verify rental payments

Second, reach out to Mike Gracz at Gustan Cho Associates on 630-659-7644. Or text us for a faster response. Or email us at [email protected]. After a brief conversation, we will discuss your qualifications and send you an application link. We are experts in Manually underwriting VA loans with higher debt to income ratios.

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